Business Model Assessment and Tuning
Business models got a lot of bad press in the Internet business meltdown, largely justified. It became an accepted term for what were really just crazy ideas that didn't get to the real business modeling stage in past. Perhaps the only benefit from this wild time is the increasing use of true business models by a much wider range of businesses.
Large businesses have had financial models since before the days of computers. Those with enough gray hair may remember cranking out ROIs and DCF figures on noisy mechanical calculators. Some of these models, especially as they were transferred to computers, became fairly complete representations of the business. Others were limited to financial aspects, with non-financial assumptions being fed in as tabled assumptions.
A true business model begins with the market and assumptions about growth, structure, and demand. It has a pricing module that reflects real pricing structures, including discounts and packages. It includes a cost module that builds costs for major product and service lines from primary cost drivers. It contains an operating expense module, and may have a separate marketing and sales module. It probably has an engineering and development cost buildup module that works from staffing projections. It should have a staffing module for the entire business since so many costs today are driven by headcount. And, of course, you almost always need a capital expenditures module. These, along with one or more specialized modules for a particular type of business, drive traditional financial statements, including the P&L, balance sheet, and cash flow. A financing module may also be needed if the business requires raising outside capital, debt or equity, on a regular basis.
If you have a business model, does it look like this? If not, you may not have a true business model but only a portion of one. Model output may be misleading if you have missed anything important that depends on model output variables. An example is cost assumptions that are volume-dependent in fact but simply plugged into the business model's costing section. Your profit picture can be way off if volume economies are not factored in properly. If your model lacks staffing tables, you may underestimate many costs that are primarily headcount-driven.
Our Services
We can help you build a business model or complete an existing business model. Our extensive experience in business model development and refining can get this done quickly in many cases. We have a large library of existing modules that can be tailored with minimal effort to new situations, eliminating much of the critical but time-consuming job of model checking and validation (you do check and validate your business models carefully, don't you?). We generally use Microsoft Excel as the modeling tool, supplemented with Visual Basic routines where necessary for certain types of complex calculations or external database access.
If you have questions or would like to discuss how we might be able to help you develop or refine a business model for your organization, please contact us.